Merger of REITs to create colossus

It was over a breakfast of fruit and coffee in a north Toronto diner
several weeks ago that Thomas Schwartz and Dino Chiesa first talked
seriously about a deal that would result in the creation of one of
Canada's largest owners and operators of residential real estate.

Schwartz, chief executive officer of Canadian Apartment Properties Real
Estate Investment Trust, and Chiesa, CEO of Residential Equities Real
Estate Investment Trust, had known each other from the late '70s. Schwartz
was a small developer then, and Chiesa was an executive at the Canada
Mortgage and Housing Corp.

The two friends would eventually become fierce business rivals as their
companies became major owners of apartment buildings across the country.

Yesterday, they joined forces, as CAP REIT announced that it would buy
ResREIT in a deal worth about $510 million.

The acquisition nearly doubles CAP REIT's portfolio by adding 10,890
suites to its own stable of 13,438 apartments and townhouses.

"Bay Street has been saying this has been a move that makes sense, and
we've been friends for a long time, but we didn't get serious until
recently," said Schwartz in an interview. "It's a good accretive
transaction. We're buying 11,000 apartments in one transaction and getting
one of the finest portfolios in Canada."

Schwartz said the companies complemented each other geographically and
strategically.

"We've tended to concentrate on mid-tier and affordable apartments, and
ResREIT has more of a luxury portfolio, so this diversification will
spread some of the risk," said Schwartz.

In some areas of Western Canada and cities such as Montreal where the
REITS were not as dominant, the combination of the two should create
synergies and economies of scale, he said.

The cash price of $18.60 for each ResREIT unit represents a 15 per cent
premium based on the 20-day weighted average price of ResREIT units on the
Toronto Stock Exchange to March 29.

ResREIT unit holders will get either the $18.60 a unit in cash or 1.216
units of CAP REIT. The offer provides for cash up to a maximum of $175
million. At yesterday's stock closing, the non-cash component of the deal
values ResREIT units at $19.11. CAP REIT will also assume about $400
million in the target firm's debt. CAP REIT said the purchase would raise
its annual distributable income to about $1.35 a unit.

"Size is important in the marketplace, and this gives larger investors who
are looking for liquidity something to look at," real estate analyst Harry
Rannala of Raymond James Ltd. said yesterday. "It's also a very
competitive market that is tough to find deals that make sense, so an
acquistion of another REIT is one way to go."

But Rannala cautioned this "is not a cheap deal. They are paying a premium
for this transaction and they're offsetting that premium by use of lower
interest rates and the synergies and savings going forward."

In an interview, Chiesa said the "price paid represents half the cost of
replacing the buildings. That's notwithstanding putting together a
portfolio of this magnitude."

ResREIT unit holders will vote in late May on the deal, which has already
been approved by its board.

Chiesa said that 32 per cent of the company's unit holders, including the
Ontario Municipal Employees Retirement System, support the deal.

The transaction comes at a time, however, when analysts are warning that
the real-estate sector may be in for a decline.

"We have an underperform on the real-estate sector in general looking
forward," said Rannala. "We clearly believe real estate is very expensive
relative to the fundamentals."